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For departing New York PSC Chair Audrey Zibelman, the quest to remake the utility system began with a single jolt.

In 2012, Hurricane Sandy walloped the East Coast, putting Manhattan underwater for weeks and leaving millions without power. It was then, Zibelman says, that New York Gov. Andrew Cuomo (D) decided to act.

“Cuomo said, for us, climate change is a reality and we have to go about building a more resilient network and rethinking our energy industry,” Zibelman told the audience at DistribuTECH 2017, the transmission and distribution trade show in San Diego.

In tandem with the governor’s office, the New York Power Authority and other state agencies, Zibelman and the PSC launched Reforming the Energy Vision (REV), a landmark regulatory proceeding to make the power system cleaner and more resilient.

“We recognized we can achieve deep decarbonization and do it in a way that makes the grid more resilient, efficient and economic,” Zibelman said. "But we have to change the model.”

Under REV, regulators aim to transform the traditional utilities into platform providers — entities that facilitate the deployment of distributed energy resources (DERs) and use them instead of traditional infrastructure to serve system needs.

“Platform companies try to find ‘common interest’ with companies that use their platforms,” Zibelman told the audience. “Rather than thinking of DERs as a threat, [utilities should] think about them as your services and your partners.”

At the outset, that was not the case. Utilities typically see DERs like rooftop solar as threats to their business, more likely to reduce revenue and cause reliability problems than contribute benefits to the grid. And while they can earn a rate of return on investments in traditional grid infrastructure, no such incentive has existed for them to meet the same needs with DERs.

But Zibelman and the NY PSC looked to change that. Under REV orders issued last year, utilities can now earn extra revenue on top of their cost-of-service earnings for enhancing system efficiency with DERs and using them instead of typical grid investments. Further reforms push utilities to leverage their role as platform providers by providing system information to DER companies.

As time goes on, regulators expect utilities will derive more of their revenue from these “market-based earnings” and performance incentives, potentially eclipsing traditional cost-of-service regulation. And as utilities realize the potential for DERs to serve system needs, markets for them would spring up on the distribution system, much like generation markets evolved on the bulk power grid after utility deregulation in the 1990s and 2000s.

The end goal is what many have termed transactive energy — a system where DERs can receive locational and temporal compensation for the services they offer to the grid in real time.

In that system, the utility acts much like a Regional Transmission Organization on the bulk grid, overseeing the interconnection, aggregation and compensation for DERs while maintaining reliability for the distribution system.

That idea is still very much theoretical — and Zibelman won’t be around to see it come to fruition in New York.

Earlier this month, she announced she would depart the PSC to head Australia's grid operator, leaving the REV docket while many of its ideas are being put into practice.

In an exclusive interview with Utility Dive, Zibelman said the foundations of REV are already in place and the evolution toward transactive energy markets is already underway. Given the pace of technological change, that new model of utility operations could emerge before anyone expects.

To me, the transactive grid is [defining] the prices accurately and learning to how to optimize these resources at the distribution level to increase the hosting capability, get more value out of the resources, and ultimately drive consumer value by cheaper networks.

Audrey Zibelman

Outgoing New York PSC chair

The transactive energy grid

At the start of 2017, two major hurdles exist in the quest for transactive energy markets.

On one hand, real-time pricing mechanisms and markets on the distribution system need to be developed so DER owners can receive compensation. But at the same time, software tools need to be developed and deployed that allow automated, real-time energy trading on the distribution grid down to the millisecond. This is where some power sector observers see an opportunity for blockchain-based ledgers that can allow encrypted trading between many parties.

“The chicken and egg issue is you have to get the prices right so we get the investment,” Zibelman said. “So what we're looking at doing in New York is creating a pathway to go from current programs around net metering to one where you really start valuing those resources, but doing it in a way that doesn’t create any cliffs so people can build business models.”

Last year, utilities and solar companies in the state came to an agreement to move away from retail rate net metering for rooftop solar and replace it with a declining incentive that will eventually be based on a PSC-defined value of solar. That order, Zibelman said, will be released later this year.

As those pricing mechanisms are put into place, Zibelman expects markets will mature to begin to value services like “real-time responsiveness, reactive power, and various things that would make the grid more stable.”

The hard part, Zibelman said, will be developing the pricing and settlement tools for DER markets to function. But after that, “the business models I think will be easier.”

“Once we price these things right, we would expect retailers to provide customers a pricing scheme that customers want,” she said. “They may just want a fixed price to internalize the complexity of managing those resources, and so that will evolve over time as the market matures.”

The endgame is a vision of transactive energy — a “prices-to-devices” platform where “resources will respond to the prices, and there could be like a blockchain-type platform that could price it out.”

“We don't expect consumers to be day trading or worrying about that,” she said. “They may just sign up for an economic program and then the devices will respond to prices and constraints that the customer might put on. But it will move I believe to much more a real-time market, perhaps a millisecond market.”

I think the endgame could be a prices-to-devices element where the prices are there and then it's more of a distributed architecture where the resources will respond to the prices and there could be like a blockchain-type platform that could price it out.

Audrey Zibelman

Outgoing New York PSC chair

Price signals and reliability

That idea of transactive energy is one of the more hyped ideas in today’s power sector, but even if the market signals are put into place, there are still significant technical roadblocks.

Utilities, for instance, will need to update their system architecture to enable them to manage more distributed resources. While California utilities are currently experimenting with such Distributed Energy Management Systems, no utility has full control software for the distribution grid up and running today.

While developing those systems will be “important,” Zibelman doesn’t see them as necessary. Instead of monitoring and controlling all DERs themselves to meet grid needs, utilities may come to rely on price signals to ensure DER services are available to balance supply and demand — much like independent generators in wholesale markets today.

“Do we really need to continue to have a command and control architecture or can we depend on price signals and people responding so utilities have an understanding of what's on their system, but what they really understand is the capability of the system at a certain level to respond to a price?” Zibelman said.

That will require utilities to understand human behavior, Zibelman continued, but it’s already happening in some REV pilot projects. The well-known Brooklyn Queens Demand Management program seeks to defer investment in a billion-dollar substation by harnessing demand management resources in the consumer base.

“The point there is that we're not building the substation so we are going to be responding to these demand resources,” she said. “The ability of utilities to be comfortable with what level of saturation do they need of DER and how that corresponds to a confidence that the load will be manageable is what we're going to be learning.”

Relying on price signals instead of central control may create worries that the distributed resources won't be there to meet grid needs. But Zibelman said the same argument was made during the deregulation of the bulk power system, and markets have evolved to ensure reliability through price signals.

“I remember when I was at an integrated utility and we were starting to introduce independent power producers into the market and they said, ‘They won’t care about reliability like our own generators,’" Zibelman said. “And guess what? We developed markets and these [IPPs] were putting more into operations and they became more efficient and more reliable because that was their only source of income.”

There’s always “fear and skepticism,” and that’s why the utility demonstration projects under REV will be so important.

“We're looking at different pricing schemes, different business models, how does it all work and it'll take some learning,” she said.

Anyone who thinks in decades anymore is not looking at the rest of the world and how quickly things are changing.

Audrey Zibelman

Outgoing New York PSC chair

Getting to transactive energy

For many in the utility sector, transactive energy remains a pie-in-the sky concept, one that few think will be achieved in the next 10 or 15 years.

But Zibelman thinks the change will happen much faster, at least in New York. While it may not be matured to scale, the outgoing PSC chair says much of the underlying technology is already available.

“I think what you see happening in California and New York is these DERMS systems are getting more sophisticated and I hear of more investment going there,” she said. “And when I talk to the providers, the vendors, they are very confident that the systems are there or will get there. It's really getting the rules right and understanding how it happens.”

That mirrors Zibelman’s experience setting up the nation’s first organized electricity market, the PJM Interconnection.

“When we were at 45,000 MW [of generation] in PJM and we were looking to expand to Chicago and into Virginia, everyone said, ‘You can’t be any bigger. It's just too big as a single control area,'” she said. “Well, guess what? It adapted to it, and I think with the ability we have now to deal with data and information, to me [the technology] just is not going to be the constraint.”

The real challenge, she reiterated, is building the regulatory incentives and market mechanisms to allow the evolution of transactive energy markets. In New York, Zibelman said the groundwork for that vision has largely been set, leaving her confident that the transition will continue when she leaves for Australia.

“What we’ve done is set the economic platform up, and really it's the market that's driving change,” she said. “I feel very good about where we are and certainly the policy isn’t going to change in New York. It's all about execution at this stage.”

With market mechanisms in motion, Zibleman said the future of a transactive energy grid could be much closer than many in the sector expect.

“I think five to ten [years],” Zibelman said. “I think we're going to see these markets continue to develop and I think anyone who thinks in decades anymore is not looking at the rest of the world and how quickly things are changing. We'll need to get there faster, but I think we will."